The patchwork approach leaves questions about how reliable or timely the revenue will be and whether more will be needed later on. We expect financial markets to stay cautious until a more concrete tax plan emerges.’
Maxime Darmet Cucchiarini
Senior Economist United States, France & United Kingdom
The autumn budget delivered limited support for businesses at the close of 2025. While there were fewer unexpected announcements than a year ago – when the Chancellor introduced a surprise increase in employer National Insurance contributions (NICs) – this year’s budget provided minimal uplift for firms heading into the festive season.
On 26 November, Britain’s Chancellor of the Exchequer Rachel Reeves announced more than £26 billion in tax changes. This came in slightly below our pre-budget expectation of around £30bn in tax increases , but it comes on top of the £41.5bn tax package delivered last year. Much of the increased taxes will support higher welfare spending (£11bn) and bolster public finances. However, the budget provided only moderate measures aimed at improving growth and productivity, which remain key priorities for business.
The budget adds further costs for businesses at a time when employment-related expenses are already rising. Headline tax increases included an extended freeze on income tax and National Insurance thresholds, as well as plans to limit pension contributions made through salary sacrifice schemes. Days before the budget, the government announced an increase in national living and minimum wages, jumping +8.5% for those aged 18-20 and +4.1% for those aged over 21.
The short-term news on GDP growth was more encouraging. The Office for Budget Responsibility (OBR), which provides independent analysis on public finances, increased its forecast for 2025 from +1.0% to +1.5%, due in large part to stronger than expected performance in the first quarter of this year. Longer term, however, the outlook was less positive. The OBR revised its forecast for annual average GDP growth in 2026-29 to +1.5% from its previously predicted +1.8%, reflecting the UK’s softer productivity growth.
Prior to the budget, we forecast that the UK economy would grow +1.4% this year, outperforming many of its peers. Following a strong start to the year (+0.7% growth in Q1), growth slowed to +0.1% in the third quarter. Amid geopolitical volatility, we expect UK growth to slow to +0.9% next year and +1.2% in 2027.
Following the budget, UK inflation looks more likely to stay higher for longer. Driven by higher food and services prices, the OBR raised its inflation forecast to +3.5% in 2025 and +2.5% in 2026, respectively 0.2 and 0.4 percentage points higher than its March forecast. We expect UK inflation to fall back to +2.9% in 2026 and settle around its +2% target by the spring of 2027.
The Bank of England (BoE) has taken a more dovish stance on monetary policy, cutting interest rates even as inflation has risen and remains above the 2% target. With UK inflation showing little sign of cooling, we expect the BoE to keep rates on hold until April 2026, with further cuts in Q3 and Q4, bringing the bank rate to 3.25% by end-2026.
A more positive aspect of the budget is the improved outlook for the UK’s public finances. The OBR gave a better-than-expected fiscal outlook with government borrowing for 2029-30 just £6bn higher than previously expected (borrowing is projected to fall from 4.5% of GDP in 2025-26 to 1.9% of GDP in 2030-31). Combined with the announced tax increases, fiscal headroom more than doubles to £21.7bn (up from £9.9bn forecast in March). While the increased headroom is welcome, it still leaves the UK vulnerable to future shocks.
We expect fiscal policy in the UK will remain under pressure through 2027. Despite the increased headroom, the OBR gives the government a 59% probability of meeting its fiscal rules, an improvement from 54% in March but still signalling limited room for manoeuvre. Slower growth will likely weigh on the fiscal deficit: we project the deficit to narrow to -5.1% GDP in 2026 , after -5.4% in 2025, while the gross debt to GDP ratio will rise from 100.5% to 102%.
The autumn budget received a relatively muted response from the markets. Nonetheless, the Chancellor will continue face tough choices as she navigates the demands of Labour MPs with the risk of a negative reaction from sovereign debt markets. The government had previously ruled out big changes to taxes (namely income tax and VAT) but is under pressure to shy away from spending cuts. For markets, increasing big taxes is a much more credible way to reduce fiscal imbalances, and maintaining manifesto commitments continues to make revenue-raising efforts more challenging.
Geopolitical volatility remains a major source of risk for the UK and global economies. In the past year alone, trade restrictions have tripled to affect an estimated $2.7trn of merchandise – nearly 20% of global imports – fueling friendshoring and regionalization. Looking ahead to 2026 and 2027, we expect global trade of goods and services to slow down to +0.6% and +1.8%, respectively, highlighting the delayed impact of tariffs and challenges for trade infrastructure.
Trade wars are not the only source of volatility for 2026. In its December Financial Stability Report, the BoE warned of heightened risks to financial stability, fueled by geopolitical tensions and mounting pressures on sovereign debt and equity markets.
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